The Securities and Exchange Board of India (Sebi)’s move to introduce a municipal bond framework might need changes in the Companies Act.
The regulator is planning to allow debt-raising under a proposed framework for municipal bonds. The new framework will allow bodies governing urban areas to raise debt to meet expenses. Such money will have to have a definite end-use and cannot be deployed elsewhere, said a concept paper that the regulator put out on Tuesday.
“The proceeds of the proposed issue shall be clearly earmarked for a defined project or a set of projects. The funds raised from issue of municipal bonds shall be used only for the projects that are specified under objects in the offer document,” it said. The move is based on recommendations from the Corporate Bonds and Securitization Advisory Committee.
The Companies Act has specified certain conditions for listing and trading of debt securities. These include having a board of directors where one-third of the members are independent; and having to comply with disclosure requirements.
The regulator might also allow for increased rates on tax free bonds that municipal bodies issue.
“In India, the guidelines issued by the ministry of urban development for issuance of tax-free bonds by municipal bodies provides that only those with an interest rate up to maximum eight per cent per annum shall be eligible for notification by the Central Board of Direct Taxes. A fixed rate of eight per cent, in the prevailing scenario is too little to attract investors to municipal bonds and therefore, there might be flexibility in setting interest rate cap by linking it to a benchmark market rate,” it said.
The regulator’s framework is to allow fund raising by municipal bodies to meet their expenses in the face of growing urbanisation.
“The steering committee on urban development for the XIth five-year plan (2007-2012), has estimated that total fund requirement for implementation of the Plan target in respect to urban water supply, sewerage and sanitation, drainage and solid waste management is Rs 12.7 lakh crore,” said the note from the regulator.
The Union government has been looking at providing for urbanisation in its annual budget.
“As the fruits of development reach an increasingly large number of people, the pace of migration from the rural areas to the cities is increasing. A neo middle class is emerging, which has the aspiration of better living standards. Unless new cities are developed to accommodate the burgeoning number of people, the existing cities would soon become unlivable,” said the latest budget speech quoted in the concept paper.
“The prime minister has a vision of developing one hundred Smart Cities, as satellite towns of larger cities and by modernising the existing mid-sized cities. To provide the necessary focus to this critical activity, I have provided a sum of Rs 7,060 crore in the current fiscal,” the finance ministry had added.
The regulator has asked for public comments on the new framework. The last date for sending feedback is January 30.
NEW RULES The Act has a number of requirements for listing and trading of debt securities
Includes having a board of directors with one-third independent members and disclosure requirements
The regulator is planning to allow debt-raising under a proposed framework for municipal bonds. The new framework will allow bodies governing urban areas to raise debt to meet expenses. Such money will have to have a definite end-use and cannot be deployed elsewhere, said a concept paper that the regulator put out on Tuesday.
“The proceeds of the proposed issue shall be clearly earmarked for a defined project or a set of projects. The funds raised from issue of municipal bonds shall be used only for the projects that are specified under objects in the offer document,” it said. The move is based on recommendations from the Corporate Bonds and Securitization Advisory Committee.
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“For effective implementation of the proposed framework, some consequential amendments may be required to be made to the Companies Act, 2013 and the rules made there under to enable raising of funds by corporate municipal entity through issue of debt securities under the proposed framework,” the paper said.
The Companies Act has specified certain conditions for listing and trading of debt securities. These include having a board of directors where one-third of the members are independent; and having to comply with disclosure requirements.
The regulator might also allow for increased rates on tax free bonds that municipal bodies issue.
“In India, the guidelines issued by the ministry of urban development for issuance of tax-free bonds by municipal bodies provides that only those with an interest rate up to maximum eight per cent per annum shall be eligible for notification by the Central Board of Direct Taxes. A fixed rate of eight per cent, in the prevailing scenario is too little to attract investors to municipal bonds and therefore, there might be flexibility in setting interest rate cap by linking it to a benchmark market rate,” it said.
The regulator’s framework is to allow fund raising by municipal bodies to meet their expenses in the face of growing urbanisation.
“The steering committee on urban development for the XIth five-year plan (2007-2012), has estimated that total fund requirement for implementation of the Plan target in respect to urban water supply, sewerage and sanitation, drainage and solid waste management is Rs 12.7 lakh crore,” said the note from the regulator.
The Union government has been looking at providing for urbanisation in its annual budget.
“As the fruits of development reach an increasingly large number of people, the pace of migration from the rural areas to the cities is increasing. A neo middle class is emerging, which has the aspiration of better living standards. Unless new cities are developed to accommodate the burgeoning number of people, the existing cities would soon become unlivable,” said the latest budget speech quoted in the concept paper.
“The prime minister has a vision of developing one hundred Smart Cities, as satellite towns of larger cities and by modernising the existing mid-sized cities. To provide the necessary focus to this critical activity, I have provided a sum of Rs 7,060 crore in the current fiscal,” the finance ministry had added.
The regulator has asked for public comments on the new framework. The last date for sending feedback is January 30.
NEW RULES
- Sebi recently releases paper on municipal bonds
- The stock market regulator is looking to introduce a new framework for such fundraising
- However, implementing such a regime will need changes to Companies Act